Credit Rallies as Europe Debt Risk Falls for 1st Time Since 2009

By Hannah Benjamin -
Dec 24, 2012

Credit markets rallied in Europe
before the Christmas holidays, adding to the first annual
improvement in debt risk since 2009.

The Markit iTraxx Crossover Index of credit-default swaps
on 50 mostly junk-rated companies fell three basis points to 459
as of 1:10 p.m. in London, according to prices compiled by
Bloomberg. The gauge has tumbled 296 basis points this year to
near the lowest level since July 2011.

The European Central Bank’s unprecedented steps to protect
the euro and prevent a breakup of the currency union has buoyed
credit on the continent since mid-year. ECB President Mario Draghi said in July he’d do “whatever it takes” to protect the
economic and political bloc from the financial crisis.

The Markit iTraxx Europe Index of credit-default swaps on
125 investment-grade companies fell one basis points to 112,
Bloomberg prices show. The cost of insuring against a default in
bank debt using the Markit iTraxx Senior Financial index dropped
one basis point to 138, after tumbling on Dec. 20 to the lowest
since May 2011.

A basis point on a credit-default swap contract protecting
10 million euros ($13 million) of debt from default for five
years is equivalent to 1,000 euros a year. Swaps pay the buyer
face value in exchange for the underlying securities or the cash
equivalent should a borrower fail to adhere to its debt
agreements.

Techem Energy Metering Service GmbH was among the biggest
gainers in the European junk corporate bond market, according to
Bank of America Merrill Lynch’s Euro Non-Financial High Yield
Constrained Index. Its 325 million euros of 7.875 percent senior
subordinated notes due in October 2020, which the Eschborn,
Germany-based metering and billing-services company can redeem
in 2016, rose 0.85 percent to 111.2 cents on the euro, the index
data show.